by ManfromMiddletown
Fri Nov 3rd, 2006 at 10:35:51 AM EST
I'm posting this as a response to Jerome's call for discussion of gas tax. I believe casting government management of energy consumption as a tax is a mistake. I believe that it is far better to cast this managment in terms of generating stability than generating revenue, thus I propose a guaranteed gas price (GGP) to restrain consumption, and further to avoid the counterproductive tendency for present conservation to create future consumption. I've reworked all this from a comment on an earlier diary.
Governments could use a GGP to drum up support for a stable gas price to encourage stability so that investments in alternative energy sources like ethanol or bio-diesel (which would seem ideal for Europe given the prominence of diesel) aren't wiped out by price drops resulting from reduced consumption (which creates increased demand in the long term, ie Jovan's Paradox)
It would be best for governments to impose the GGP when prices are at their peak. The second aspect of this would be a guaranteed rate of return for oil companies set at 5-7% over cost. Oil companies would have to open their books to ensure that no accounting tricks were played to boost costs to ensure a larger profit.
Suppose that gas rises to €4/litre, and the government implements a guaranteed gas price. Although consumers lament the high price, do they prefer price stability over the uncertainty that prices might go down?
If the price is imposed at the peak, then as prices fall resulting from reduced demand brought on by conservation measures, the difference accrues to the government. It's a Keynesian approach to gas taxes.
Governments can pump billions of euros into conservation measures, however so long as short term reduced demand results in long term increased demand by creating uncertainty about the relative value of conservation costs versus the long term percieved price of gas, the conservation effots may be counterproductive because of Jevon's paradox. By internalizing government induced economic gains from conservation, uncertainty is reduced. The key is to remove the price function from the market which has failed in internalizing the external costs of gasoline.
While the implementation of a guaranteed GGP might require governments to forgo tax income in the short term, in the long term the stability brought on by a guaranteed prices allows consumers to make exact calculations of the value of conservation measures. And if governments are able to reduce demand by 10% instead of that reduction fueling demand, the reduced price creates a gain to the government.
An example.
Suppose that the GGP is implemented at €4/liter, and the government spends €50 million to implement conservation measures. These measures (grants to reduce the price of fuel-efficient vehicles, grants to biodiesel producers) reduce demand by a full 10%. Before the conservation measures, annual consumption was 10 billion gallons, after it is 900 million gallons. Now suppose that the pre GGP price of gas moves from €4/litre to €2.75 as a result of the demand reduction. That means that €1.25 minus €0.20 for oil company profits goes to the government, so the government gains €1.20 a gallon. In the long term, a GGP is the equivalent of a 38% tax.
By creating guaranteed pricing for renewable alternatives beneath the €4 GGP, renewable energy that reduces dependence on becomes the cost efficient option always.
The main thing is to create stability, so that individuals can make explict long term calculations on the value of conservation that don't include an uncertainty factor.
